Cross Sectional Correlation

Diversification is hard to find nowadays because financial markets are becoming increasingly correlated. I found a good visually presentation of Cross Sectional Correlation of stocks in the S&P 500 index in the Trading correlation by D. Varadi and C. Rittenhouse article.

Let’s compute and plot the average correlation among stocks in the S&P 500 index and the the average correlation between SPY and stocks in the S&P 500 index using the Systematic Investor Toolbox: